Kerby Anderson

Congress will once again take up the issue of tax reform. Although many of us would love for our taxes to be easy to calculate and simple to file, we know that won’t happen in the near future. What can be done? The editors of the Wall Street Journal published a few principles we can use to evaluate the current debate about tax reform. First, there should be a priority on growth. “After 12 years of a lackluster economy, or worse, tax reform’s overriding goal should be to lift annual GDP to 3% or more.” Second, Congress should make cuts immediate. There is a temptation to phase-in tax cuts, but that delays any response as investors wait for lower rates in the future. George W. Bush learned that painful lesson with his 2001 tax cut and corrected it with his 2003 cuts, which were immediate. Third, make tax reform permanent. Businesses “invest with a long tail” and won’t implement projects if lower rates may evaporate a few years from now. Again, this was a mistake George W. Bush made. Fourth, tax reform should entail more than just tax cuts. Our current tax code has all sorts of subsidies for electric cars, real estate, and even racetracks. Ending these subsidies will actually pay for lower tax rates. Finally, the editors recommend that Congress not fall into what they call “the deficit-neutral trap.” The Congressional Budget Office scores budgets. But it does not accurately take into account the economic reaction to changing tax rates. If you lower taxes, the CBO says you will lose tax revenue. But when you lower taxes, more people are likely to invest and you often end up with more tax revenue. As Congress and the media discuss tax reform, it is worth remembering some of these principles. They will help you sort out some of the information and misinformation during the debate.